One of the most fun aspects of student loans is that you ultimately owe the money to the federal government. Uncle Sam has given himself unusual powers over the decades to recover outstanding student debt, which now amounts to an estimated $7 billion nationwide. A law passed in 1996 made loans undischargeable even in Chapter 7 bankruptcy (another law, which took effect this month, makes Chapter 7 bankruptcy nearly impossible for those who earn at least the median income). The government also retains the power to garnishee 15 percent of your wages without taking you to court, and to withhold tax refunds, Social Security and disability payments, or even federal disaster-relief payments to pay off the debt.
An appeal heard today by the U.S. Supreme Court calls that last rule into question, and could have far-reaching effects for millions of student borrowers. James Lockhart is a 67-year-old man with diabetes and heart disease currently living in public housing in Seattle. According to the brief before the court, between 1984 and 1990 he borrowed $80,000 in federal student loans to attend various college programs. He never graduated nor found employment except for a few months in 1987. In April 2002, the Department of the Treasury officially informed him that his Social Security disability payments, then $874 a month plus $10 in food stamps, would be cut—“offset”–by 15 percent to pay his old student loans.
Lockhart found legal help from the nonprofit group Public Citizen, founded by Ralph Nader. His attorneys are arguing that the net effect of two contradictory statutes–one authorizing the government to seize all federal payments for student loans, and a later law protecting Social Security payments from attachments for old debts–should be to protect borrowers like Lockhart from the seizure of their checks to pay off loans that are more than 10 years old. In a similar case this year, the Eighth Circuit Court found in favor of the elderly Social Security recipient.
The petitioner’s brief notes tartly that the government is pleading poverty in its case against an elderly, disabled man by saying that student loan defaults have a “significant budgetary impact.” The note calls this assertion “both speculative and irrelevant.” Most of the few opinion columns published on the case have come down on the side of the government–including, surprisingly, one published in The Lantern at Ohio State. “If borrowers refuse to own up to their responsibility, then the government should be able to seek repayment through unconventional means,” wrote the students.
But are outstanding student loans really the borrower’s responsibility alone? Consider the following: 58 percent of federal financial aid now comes in the form of loans. Eighty percent of students are now working while enrolled, but in order to pay for an average year of public school, a person would have to work full-time for a year at a minimum wage job. So two-thirds of students are borrowing their way through school, but the scary part is that the six-year graduation rate for students at four-year colleges is only 54 percent–education experts say that’s partly because students are working so many hours and dropping out or going part-time to save money. For those like Lockhart who do not earn a degree, paying off student loans is a bitter and sometimes insurmountable task.
If these trends persist, and if Lockhart loses his case, the Bush administration won’t have to bother with its plans for reforming Social Security. Benefits will be slashed anyway in 20 years to pay off everyone’s old student debt.